State, provincial regulators raise red flags on virtual currency

(The author is a Reuters contributor. The opinions expressedare his own.)

By Neil Stempleman

Oct 15 (Reuters) - Consumers may be headed for trouble whenthey turn over bank and brokerage pass codes to investmentadvisers or get pulled into investment scams involving digitalcurrencies, state securities regulators said.

The North American Securities Administrators Association onTuesday added the two technology-related issues to its annuallist of top investor threats, where they joined the ongoingcatalog of risks the NASAA has highlighted in previous years,including oil and gas drilling and real estate investmentschemes.

The regulators' organization said digital currencies, suchas Bitcoin, offer consumers another way of paying for goods andservices, but they also provide a "fertile ground for scamartists to capitalize on ... (their) increasing popularity andacceptance."

The regulators said that digital currencies are highlyvolatile and the concept is difficult for even the sophisticatedinvestor to understand.

Bob Webster, director of communications for the association,said the warning was not about using Bitcoins or other virtualcurrencies, but about con artists using Bitcoin as a cover orinvestment lure.

Putting virtual currencies on the association's list will"raise some flags, (and) put this on investors watch," he said. "Investors should try to learn and understand more aboutBitcoin."

Bitcoin's website notes the volatility of the currency, andrisks from trying to get rich from using the new currency. Thewebsite also says, "Bitcoin has no official organization,individuals with authority, nor spokespeople."

A co-founder of BitPay, a company that specializesprocessing Bitcoin payments, agreed with the NASAA's assessmentof the danger from virtual currencies. Stephen Pair, who is alsoBitPay's chief technology officer, said in an email: "For anyonethat does not understand decentralized, cryptographic currencieslike Bitcoin, it is not a good idea to invest in them."

"Aside from the fact that they are very new with a shorttrack record, safely storing large amounts of them requiresskill and experience in computer security," he said. "The NASAAis correct in stating that scam artists are attempting tocapitalize on the rising popularity of Bitcoin."

UNLICENSED ADVISERS

Whenever an account is created, banks and brokerages warnabout the dangers of giving out a user name and password to astranger, but investors do not always listen.

The NASAA warned against "allowing an unlicensed individualto have access to the username and password for your brokerageaccount or worse, allowing an unlicensed individual to set up abrokerage account in your name."

Brokers working for major firms are licensed and bonded.

The association said investors should check with their statesecurities regulator to confirm that anyone seeking to managetheir account is properly registered.

TOP THREAT

The top threat to investors is still fraudulent privateplacement offerings, the association said. These offerings arecommonly called Reg D/Rule 506 offerings, after the federalsecurities law that allows private placements withoutregistration. The association said these are "limited investmentofferings that are highly illiquid, generally lack transparencyand have little regulatory oversight."

While the offerings are used by many legitimate companies toraise capital, "they carry high risk and may not be suitable formany individual investors," the association said.

That is significant now, because recent U.S. laws haverelaxed restrictions on how these offerings can be marketed, and"investors soon will begin to see advertisements for privateplacement offerings on a variety of platforms including socialmedia, billboards, or t-shirts on window washers as one startuphas proposed, even though only a very small percentage of the population will be eligible to invest," the group said.

Other top threats listed by the association includedhigh-yield investment and Ponzi schemes, scam artists usingself-directed IRAs to mask fraud, and risky oil and gas drillingprograms.

The association's members include state and provincialregulators in the United States, Canada and Mexico. The threatlist is based on anecdotes and complaints from investors, andenforcement data collected by these regulators. Webster said theassociation would be releasing enforcement data on these threatsin a few weeks.

(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance Editing by Linda Stern and Steve Orlofsky)